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2011 07

the nation owns about a quarter billion ounces of gold, valued at the quaint old figure of $42 2/9 per ounce. This stock serves as collateral for about $11 billion of gold certificates on the books of the Federal Reserve. The Treasury and the Fed could swap the old certificates for new ones based on a value closer to the current market price of $1,650 per ounce. To balance its books, the Fed would credit the Treasury’s account an additional $400 billion or so. This should be enough for even our improvident government to run for a few more months. Such an accounting transaction has the attraction of being done before in identical circumstances, as pointed out by my colleague Alex Pollock. In 1953, the Fed similarly “monetized” the gold after the Congress failed to pass an increase in the debt ceiling. This by the way, highlights the bipartisan nature of debt-ceiling dramatics. At the time, Republicans held the presidency and majorities in both chambers of the Congress.

I have an article at The Conversation on the results of a survey of the policy views of members of the Economic Society of Australia. Along with poorly worded questions, the survey suffers from a selection bias problem. The survey is arguably more representative of those ESA members interested in public policy than of economists more generally.

Judy Sloan beat me to the punch in commenting on the response to the minimum wage question. As Sloan quotes Jim Buchanan:

no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimum scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores.

Supporters of the gold standard like to point out that since creation of the Fed in 1913 the dollar has lost 95% of its value. Well in 1913, the dollar was convertible into an ounce of gold at $20.86 an ounce. So while the dollar has lost 95 percent of its value, gold has appreciated even more rapidly than the dollar has depreciated. If gold had kept its value in 1913, its value today would be somewhere between $400 and $500 an ounce. Accept for argument’s sake the claim of supporters of the gold standard that the recent run up in the value of gold was caused by a loss of confidence in the dollar. Would it not be reasonable to conclude from that assumption that if the dollar were made convertible into gold, people would then start selling off their gold, the threat of dollar depreciation having been eliminated?

But wait. If people started selling off their gold, the value of gold would decline. If the real value of the gold fell from its current value back to its value in 1913 when the dollar was convertible into gold at $20.86, the value of would lose two-thirds to three-quarters of its value. We are talking about two or three hundred percent inflation. Does that make feel more confident about the value of your savings?

Peter Wallison responds to the Report of the Democratic Staff of the House Oversight and Government Reform Committee:

The report of the Democratic staff of the House Committee on Oversight and Government Reform—although it attempts to call my conduct into question as a member of the Financial Crisis Inquiry Commission—actually indicts the Commission. The facts are these. From the outset of its “investigation” the Commission’s chair, Phil Angelides, was intent on reporting that the financial crisis was caused by greed, misconduct and lack of regulation of the private sector, exculpating government housing policy from any significant responsibility. Evidence of this can be seen in the fact that in December 2009—before any investigation had been done—Angelides handed the commission members a list of hearings that the Commission would hold over the succeeding 8 months. Those hearings focused on the private sector’s role in the financial crisis, and paid scant attention to the government’s role. This was fully in accord with the interests of the House and Senate Democrats, who were intent on establishing this narrative as a basis for enacting the Dodd-Frank Act, which sought to impose substantial new regulation on the U.S. financial system.

The expansion of agency debt not only imposes risk and realized losses on taxpayers—we recall the $160 billion that the U.S. Treasury has been forced to put into Fannie and Freddie to prevent their financial collapse—it also increases the cost of Treasury’s direct financing by creating a huge pool of alternate government-backed securities to compete with Treasury securities, and thus increases the interest cost to taxpayers.

So although agencies are not “officially government debt,” they undoubtedly increase the required interest rates on Treasury securities, in my judgment, and thus increase the federal deficit. The greater the amount of agency securities available as potential substitutes for Treasuries, the greater this effect must be. As a manager of a major institutional investor told me recently, “We view Fannie and Freddie MBS as Treasuries with a higher yield—so now we own very few Treasuries.”

As I note in my chapter, the Henry review should have been an embarrassment to most Australian journalists writing on the subject of capital gains tax and tax expenditures. George Megalogenis characterised the Henry review as ‘cheeky’, which is as close as he comes to acknowledging that the review’s conclusions and recommendations invalidate most of what George has written on these subjects. Australian journalists have misread (or simply failed to read) the fiscal implications of the Treasury’s tax expenditure statements. They are certainly not alone in doing this, but that is no excuse.

Congratulations to Jos Theelen of the University of Amsterdam, who took out first prize in the MNI-Deutsche Börse Economic Forecasting Competition. Along with Daiwa Capital’s Mike Moran and myself, Jos was the only other person to place in two of the three forecasting rounds.

This was my first foray back into forecasting since the financial crisis and it was interesting to see that many of the pre-crisis forecasting relationships still hold. The final June round was particularly brutal, however, given the bearish turn in the US data.

Hopefully, MNI-DB will turn this into a regular event. There are too few independent, public tests of economic forecasting ability.

If your first pay packet of the new financial year is a bit lighter, it is probably due to the flood levy, the first discretionary federal tax increase in over a decade. Robert Carling wrote a paper for CIS in 2007 on the misuse of tax earmarking, of which the flood levy is a good example.

Tax increases should not come as a surprise following the unfunded fiscal stimulus of 2008-09. Announcing an unfunded fiscal stimulus is equivalent to announcing a future tax increase. It is just a matter of when the increased tax burden will have to be paid. The increase in household saving that accompanied the stimulus suggests that households understand this.

Announcing the details of the re-jigged Rudd-Turnbull CPRS at the end of the same week that many taxpayers will experience their first discretionary federal income tax increase in over a decade is a curious political choice to say the least. It can only add to the unpopularity of the new CPRS.

Paul Barratt agrees with me that foreign investment in Australian agricultural land does not raise questions of sovereignty or food security. However, he argues that foreign investment may give rise to other ‘national interest’ concerns. Barrett gives as an example the proposal by Chinalco to increase its stake in Rio Tinto. Yet the concerns raised by Barrett in this context were investigated and dismissed by the ACCC. Similarly, the Australian Taxation Office has a very broad mandate and strong powers to address the transfer pricing issues raised by Barrett.

The point of my article in the Australian Financial Review was not to say that commercial transactions should be outside the scope of regulation. As I noted in my op-ed:

Australia has a robust regulatory framework around land use and business investment more generally. Politicians should put their trust in these frameworks, rather than seeking new mechanisms for political interference and meddling in commercial transactions.

The Foreign Acquisitions and Takeovers Act (FATA) and the FIRB do not add anything useful to the regulation of business investment in Australia that is not already addressed by other agencies, upon which the FIRB relies heavily for advice. FATA and the FIRB exist only to provide a mechanism for political interference in the market ownership and control of Australian equity capital. Parliament should legislate to regulate business investment in the national interest, regardless of ownership. But this can be done effectively without the FATA or the FIRB.

I have an op-ed in today’s AFR arguing that Australia’s politicians are united as much by a desire to meddle as by xenophobia in their opposition to foreign investment in agricultural land. Text below the fold (may differ slightly from edited AFR text).